Federal Corporation Taxes

Most large corporations are classified as C corporations and are required to file a federal corporate income tax return with the IRS every year. There are four basic rates—15%, 25%, 34%, and 35%—and two “bubble rates” of 39% and 38% which have the effect of taking away from high-income corporations the benefits of the lower rates.

If the corporation qualifies, it may elect to be an S corporation. These companies do not (with certain exceptions) pay corporate tax on income. Their income is instead passed through and taxed to shareholders. There are several requirements a corporation must meet to qualify as an S corporation, including having 75 or fewer shareholders and having only one class of stock. The reduction of individual income tax rates, passed in 2001 and accelerated in 2003, has greatly increased the number of firms that save taxes by organizing as S corporations.

In 2004, Congress enacted and the president signed the American Jobs Creation Act of 2004. It replaced the exclusion for extraterritorial income after that provision was ruled illegal by the World Trade Organization. Along with that tax hike, Congress passed a cornucopia of corporate tax breaks, most notably a cut in the top rate from 35% to 32% for “manufacturers,” broadly defined.

Corporate Tax Rates

Taxable income

Tax rate

First $50,000

15%

$50,001–$75,000

25%

$75,001–$100,000

34%

$100,001–$335,000

39%

$335,001–$10,000,000

34%

$10,000,001–$15,000,000

35%

$15,000,001–$18,333,333

38%

Over $18,333,333

35%

NOTE: In 2005, U.S. corporations were permitted to bring earnings back from overseas that normally would have remained abroad for tax reasons, declare them as taxable profits, and pay a steeply discounted tax rate of 5.75%.